Should I just leave everything to my spouse to avoid Taxes?

Posted on Oct 10, 2011 4:40pm PDT

A came across an interesting article on Al Davis today (click here for article). You might have heard about Al Davis's death if you have been watching the news or if you happen to be a sports fan. (If not, he was the owner of the Oakland Raiders). You might also know that Al left everything to his wife, and that Al's son Mark, who was involved in the business of the team prior to his father's death will probably be running the team now. Sounds pretty normal, doesn't it?

What you probably don't know is that Al's wife will most likely have to sell the Raiders pretty soon, regardless of her son's ability to run things. The reason has nothing to do with mismanagement of the organization, or anyone's inability to run the show. No, the reason is because Al left the team directly to his wife. Let's examine this for a minute.

The Estate Tax laws currently provide for an unlimited exemption on gifts to your spouse (so long as he/she is a U.S. citizen). This means no taxes on everything left to your spouse…or does it? The answer is that it is true that the excluded gifts will not be taxed at your death, but the IRS and the State of Connecticut will not let it go that easily. When your spouse dies after you, unless some planning was done to eliminate or reduce the tax liability, all property that you left to your spouse that remains unsold prior to your spouse's death will be included in his/her taxable estate. In short, this means that the Federal estate taxes and Connecticut estate taxes "avoided" at your death, were in effect, only postponed.

Now let's get back to the Davis family. They are most likely very wealthy, but the Oakland Raiders Organization is worth around $761 million. They probably aren't rich enough to pay the estate taxes on the organization when Al's wife dies. So, the result is that the organization must be sold beforehand. Imagine for a moment that this was your family business, or a vacation property, or simply a collection of valuable family heirlooms. It could be disastrous!

The good news is that this is something you can remedy. Consider discussing a credit shelter trust with an estate planning attorney. For those of you with larger taxable estates, consider irrevocable trust planning or gifting strategies. Used properly, these tools can help avoid a loss of your hard earned wealth for the purpose of filling government coffers. If you have questions about this or would like to discuss estate planning with a Connecticut estate planning attorney, feel free to contact us here.

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